That being said, calling these platforms "ponzis" isn't correct, the most you can say is that they were front ends for a ponzi. It would be like setting up a front-end to receive investments, and then depositing the money with Madoff. I'm not saying that it is a legitimate business, just not a ponzi.
And I'm not defending these companies either, a very light DD [2] made it obvious that the LUNA-UST mechanism was broken and the collapse was inevitable. It's really messed up that they put clients' money at risk, and that they lost it. I also think that YC is somewhat responsible for this.
What makes the situation even worse is that the collapse didn't happen from one day to the next, they actually had time to pull the money out at a 0.5%-5% loss, but they still decided to wait and see if it would repeg.
[0] https://twitter.com/josusanmartin/status/1478185473499615233
[1] https://twitter.com/josusanmartin/status/1478188494463848448
[2] This DD took me less than 1 hour: https://twitter.com/josusanmartin/status/1524323026942242818
So, it’s neither legitimate nor a Ponzi. Cool, what is it then?
Umm, once it's not a legitimate business, it's fraudulent. Exactly what type of fraudulent is a somewhat secondary issue.
[of Boiler Room scams of old] "... often rely on high-pressure sales tactics, such as aggressive cold-calling, misinformation, and extravagant promises to assure buyers that they are buying "a sure thing." [..] The SEC requires brokers to adhere to strict standards when selling securities. Brokers may not misinform or omit material facts when selling securities; nor can they exaggerate their own track records. They are also required to have a “reasonable basis to believe that a recommended transaction or investment strategy is suitable for a customer.”"[0]
Ring any bells?
Do we think customers are really giving informed consent before putting their savings into these platforms?
This was absolutely a thing; most large Ponzi schemes have feeder funds.
https://www.reuters.com/article/us-pwc-madoff-settlement-idU...
Something like this happened with Madoff in a very similar manner to what you describe.
Madoff was a board member on one the schools at Yeshiva University. J. Ezra Merkin was on Yeshiva University's investment committee. Merkin funneled some of the University's money directly into his own fund which turned out to be 100% invested in Madoff.
Now, in some ways this is an even bigger ethical breach. lets say Merkin didn't know that Madoff was sketchy, why does he have to use his fund as a middle man for the University's funds when Madoff is on the board so he presumably can invest the funds directly with Madoff. The only reason is to skim off the top. For others, who didn't have an entry into Madoff's funds themselves, perhaps the middleman has value (assuming the middleman really believes in the underlying investment, if they are just there to skim off the top, the I would say they are not fundamentally different than ponzi themselves, as they are just pulling a Sgt Shultz, "I see nothing, I hear nothing, I know nothing")
Hanlon's razor.
https://www.hbs.edu/faculty/Pages/profile.aspx?facId=697248
https://medium.com/terra-money/have-you-met-marco-216ca2a8b9...
https://assets.website-files.com/611153e7af981472d8da199c/61...
https://cdck-file-uploads-global.s3.dualstack.us-west-2.amaz...
Why did you decide to join Terra?
I thought Terra provided the perfect environment to apply what I learned in my research. Ensuring the stability of a digital currency closely resembled the issues faced by central banks in deciding monetary policy measures, while the lessons learned in studying trading in the equity and bond markets are crucial in guarding against potential manipulation by malicious market participants.
What do you think are Terra’s strengths compared to other blockchain projects or potential competitors?
There are several, but I will mention just three. First, there is no improvisation. In fact, our strong research team stays grounded and informed by the latest research in economics and finance, devoting a lot of attention in making sure that Terra’s ecosystem remains stable. Second, top eCommerce companies in Asia are pushing for Terra’s adoption, ensuring that Terra will be widely used from the start. Finally, the team is composed by a diverse and uniquely qualified set of people that are excited to collaborate in solving one of the most exciting challenges of our time.
I feel like "ponzi" has become the "magazine/clip" derailer of crypto discussions.
1. Loan Application (Borrower Lying about income) 2. Mortgage Originator ( Not validating loan application ) 3. Mortgage Back Security Creators ( Obfuscate what is in the security ) 4. Ratings Agencies ( Not being honest that step 3 happened ) 5. Sellers of MBS ( Not being honest that steps 1-4 exist )
I don't know enough about crypto to list out all the layers but I'm pretty sure I understand the first step:
1. Claim that underlying technology will be revolutionary just like the internet in a vague way that cannot be validated.
Excuse my ignorance on crypto. I don’t understand how UST can drop 90% when I assume it required some sort payment of some other currency/coins to get mint them. I heard it was tens billions of UST was minted. So what happened to these coins? Were they used to pay out the interest?
They answer all your question and are much more cohesive than anything I could type here.
It's very easy to join a "conversation" by picking up a pedantic point. Compare that to arguing over the fundamentals which actually requires some knowledge and experience.
By being pedantic it's very easy to "win" an argument, you're entering with a position you consider factually correct.
It's not at all productive as you indicate, and actually harms more productive conversation by de-railing the conversation.
This is a pretty meaningless distinction if you invested in them, because you were exposed to the same mechanics, but it does have some implications for culpability because it's the difference between “should have known it was a ponzi” and “actually operated a ponzi”.
I'd treat the offer of earning 20% interest on a risk-free investment with the same scepticism I'd treat the offer of buying a perpetual motion machine.
You can have abnormally high interest, or your capital can be risk-free. I simply don't believe it's possible to have both, at least not over the long term.
Given that there’s literally no productive return-producing enterprise underpinning any of this it’s totally fine to consider the word ponzi at least loosely applicable to the entire concept of cryptocurrency as practiced.
Thanks, some great stuff. This[0] jumped out at me:
"But there is no magic here. There is no algorithm to guarantee that Luna is always worth some amount of money. The algorithm just lets people exchange Terra for Luna. Luna is valuable if people think it’s valuable and believe in the long-term value of the system that you are building, and not if they don’t.
The danger here is that Point 7 never goes away. Any morning, people could wake up and say “wait a minute, you just made up this all up, it’s worthless,” and decide to dump their Lunas and Terras."
Terra and the Anchor protocol should have appeared fraudulent to any expert from the very start.
“Terra achieves price stability by creating stable incentives for mining (PoS consensus) via highly predictable rewards. We propose a framework to evaluate the stability of Terra’s peg under stress. […] Our findings, based on 1 million years’ worth of simulation data, indicate that Terra’s peg is highly robust under both forms of stress.”
Not only do feeders increase the sales force the reduction in yield by the feeder's profit margin actually helps hit more of the potential market: People hear 20% apy and assume it's a scam... but 15% apy? 10% apy? -- starts just sounding like a good deal.
How much of the real value of cryptocurrency is not monetary? How much of the value is in the existential value of participation, e.g. Dogecoin?
“Its not a Ponzi, it's just paper thin layer of indirection on top of a Ponzi, which is often how most victims of a Ponzi scheme are brought in” is maybe not as important of a distinction as you are making it out to be.
In many jurisdictions around the world, there isn’t much of any difference between “directly handed the loaded gun to the killer” and “pulled the trigger and killed someone”.
Sincerely, an old fart who hasn't seen 35 in the rearview mirror for a while now.
For what it’s worth, I was also 35 once.